Question

In 1999, Sony introduced a new product into the U.S. market.It was Aibo, the first interactive robot dog. It was able to learn its name, respond to commands, dance, and be programmed to perform a variety of actions.

Assume Sony’s variable costs for producing this product were around $700, and market research indicated that the VTC of this product was around $1,400. Recommend a price thatconsumers should be charged for this product, and explain how you considered the factors determining initial-pricing strategy in making your recommendation.

Answer 1

We have a contribution margin of the product i.e CM=VTC-VC $1400-700=$700.

and % CM VTC-VC/VTC x 100=$1400-700/1400 x 100= 0.50 i.e 50% it is a measure of the profitability of the product.

As it is a risky new product hence SKIMMING strategy is better to decide its initial price which is a price less than VTC.

The riskiness of new products is likely to overwhelm, customers concern about price. For the early adopters, the excitement of the product's new capabilities and perhaps the pleasure of social attention of being the first to own a new product tends to lead them to accept higher prices.

A high price would help financially for promotional efforts.

If a new product by competitive brand enters in the market at a low cost then the company may reduce the price of the product to remain in the competition.

So the new price should be around $1250+/-50 based upon delivery charges and quantity orders.